Thursday, October 15, 2015

Alibaba - yeah right Jack

Jack Ma - the Founder Chairman of Alibaba - released a letter in response to recent movements in the stock and fears about the Chinese consumer.

Linked here (and quoted below) is the Business Insider story about that letter.

“All in all, China’s economy has immense potential. It will not be easy, but China’s future ‘economic miracle’ will lie in its ability to boost productivity and its use of big data and Internet technology to stimulate domestic consumption and generate exponential development opportunities,” wrote Ma.

Alibaba is a massive retailer in China. The company estimates that there are 367 million users on the service spending around $US1,056 per person annually.

China is also a country which has a very low private consumption rate. The World Bank estimates a domestic consumption rate of about 36 percent of GDP. This is the flip side of China's huge saving rate.

Calculate it: household consumption per capita is roughly USD 2,650.

So the Alibaba amount of spending per user (USD 1,056) is almost 40 percent of that number.

Yeah right Jack.

John

PS. I figured there would be a few objections to this. So lets go through them.

Here is the original Jack Ma letter. He states explicitly that the marketplace does 3 trillion RMB of gross merchandise value. With 6.35 RMB to the USD this says that the gross merchandise value is USD435 billion. This is a bit over 4 percent of GDP or almost 12 percent of all household consumption.

The number of consumers is not stated in that letter - but the number of customers of Alipay is (that is 400 million) and Alipay has more customers than Alibaba. Alibaba's 367 million customers are widely reported. This calculates at about USD1,185 per customer. The 40 percent number estimate above becomes an even more outrageous 44.7 percent.

You may object that the 367 million customers are richer than the average Chinese person - and you would be right. However they cannot be 4 times richer because then the average income of the billion people who are not Alibaba customers would be below zero. They may be twice as rich plausibly, three times as rich if you really stretch it. But that is stretching it and the really rich in China do a lot of non-online spending (luxury cars, watches, travel etc). The 44.7 percent number calculated above is an overestimate - but however you estimate it the number will seem strange.

I think basically you are saying the GMV seems too big, the letter does state that the GMV of china's retail market place is RMB2.44tn and this is claimed to be already greater than 9% of China's retail sales. I think that this number of 9% of retail sales is the relevant ratio to think about. 367mm monthly active users is roughly 26% of population and roughly 50% of population with internet access. Wechat as of August reported that they have 600mm monthly active users (though they do not say how many of those are based in China).

to add on the comment of 9% of retail sales as the number to think about. Total (ie. amazon + everyone else) U.S. e-commerce sales is ~7.2% of retail sales (https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf) whilst Alibaba's number alone is 9%+ already.

I believe it's pretty well established among participants that all Chinese e-commerce platforms tolerate fake transactions, a high % of total sales by merchants are fictional to boast their ratings and rankings. This is well known fact within the industry and quite openly discussed among Chinese sites.

Alibaba is B2B focused. Also, businesses can resell items. Further, businesses can have more than one account. You overrely on the "per person" assumption that the journalist makes. Don't fall into the same trap.

So what if GMV is overstated? BABA reports GMV on gross basis, not net of returns, so it is definitely inflated. Just because GMV is overstated doesn't mean revenues are. Reported monetizations rates, after all, are much lower than what actual Tmall/Taobao sellers will tell you they. But why does it matter? If actual GMV is lower than reported, one could argue BABA has more room to grow GMV. Your thoughts John?

Online shopping is much more advanced in China compared to the United States. Primarily because the existing retail infrastructure never really had time to develop before the Internet came along. Unlike American consumers, Chinese ones never got into a habit of going to Wal-mart every week before Taobao and Tmall came long. So it does not surprise me that online is a much larger percentage of the retail basket there than here in the U.S.

It is also not clear to me what incentive Jack / Alibaba has to fraudulently inflate its GMV figures compared to the huge downsides of being found out / sanctioned by the SEC etc.

Another unique characteristic of the Chinese market is that people buy everything online nowadays, from a $10 lunch delivered within one hour, to massage services whereby a masseur comes to the customer within hours, to all kinds of other products and services... e-commerce in China is much more than just buying "traditional" goods online. The key is quasi-instantaneous delivery making people lazy and not going out to brick and mortar shops anymore...

I think the point John is trying to make is that these numbers do not look believable. In the US we spend about 2.6% of out total personal consumption online (according to the US government), and just about everyone shops online. Whereas according to Jack Ma and the Chinese government, greater than 10% of total nationwide consumption is spent on Alibaba. First, this is not the only Chinese shopping site. Second, a lower proportion of people are shopping online in China (please don't dispute this). Just so everyone understands nationwide consumption includes things like food, healthcare, autos, housing, etc. All of that does not exactly happen online. This might be why O2O is so important to Jack. He seems to already have a monopoly on the rest of the purchases. As to why you would want to inflate the transaction value of a marketplace that relies on advertising for revenues and where the proprietor gets to hold your cash in escrow for an extended period of time - I would have no idea...LOL

It's important to understand the level of mis-rep that's going on re: BABA's GMV. For some reason, the world believes that it's comprised of small items delivered by tricycles to individual households. The bulk of the GMV is comprised of Real Estate, Bad Assets/Loans, Cars/Trucks, Industrial Goods, etc. sold in a "Craigs List" manner (outside the BABA platform) but reported as GMV. BABA's transnational value added is minimal. Product Links provided on my blog.

GMV should be overstated by around 15%~25%. The reason is not because Jack Ma's ethics, it is because of fake transactions. And this is because the shop owners need to maintain their positions in the search results. So they will hire 3rd party to purchase and leave positive feedback. As you can imagine, it is ALMOST impossible to detect such fraud by looking at data.

I doubt BABA will fake GMV numbers as it is risky and make it difficult to govern the corporation.

Anyway, GMV is not directly related to sales or profit of BABA. I hope it is helpful.

If the GMV is correct, BABA will account for the ENTIRE online transactions in China. And this is impossible.

What went wrong is that there are tons of fake transactions. They exist because shop owners need to have a lot of transactions and positive feedback logs to be on the top search query. My estimate is around 15%~25%. BABA has done a lot to find such fake transactions vendor, but fraud detection can never be extinct.

I've bought goods from Alibaba middlemen before. Isn't this because Alibaba is involved in every part of the supply chain, not just end consumers? So the same piece of physical good may be counted 3 or 4 times.

I used the alibaba site to contact a seller and bought some EV stuffs. No sure it is counted or not because I paid it offline. The B2B part could be huge, because the amount is usually larger than what the regular consumer pays.

My first reaction to this is it's possible the b2b is skewing the average annual purchase up, and what we need to see is a distribution or a breakdown into segments. I can't find one. Has anyone had better luck?

The BABA GMV numbers are substantially overstated. First of all, GMV includes cancellations and returns. This alone could be substantial.

Then there's brushing. My research indicates that this could be more than 10% of GMV.

GMV is easily overstated by 20-25% from these two items.

Then there's the B2B transactions on the various properties... I don't know how much, but it could be a decent number.

Secondly, Chinese spend a ton of money online. Being in Australia, you probably don't understand this. The bricks + mortar shopping infrastructure in China is terrible. For categories like shoes, clothes, electronics, etc 30-50% of consumption is online. China has completely leapfrogged the rest of the world in shopping patterns.

Lastly, the national accounts are completely screwy. I've tried to make sense of them many a time, but can't.

The average household in a city like Shanghai and Beijing (2 working adults) easily has USD$10,000 of disposable income each year. It wouldn't shock me if they spent $3,000 of that online.

I don't see anything inconsistent with Jack Ma's statement. The people who buy from BABA have incomes above the median.

What frightens me about Jack's letter is the statement that his mission is to help Chinese people. He listed investors as last in line of importance. If customers and employees come first, then I don't expect much left for investors. But, hey, full throttle growth with losses year after year works for AMZN.

You can't compare Alibaba sales with Amazon or the likes because,quite a large number of buyers are distributors from foreign countries. It is stated the international sales is at marginal amount (less than 10percent) but what you need to know is, those bulky buyers basically went to China to buy or they buy via middleman as to smoothen the tax bureau process in their own countries, Indonesia for example. It is cheaper to use freight forwarding where those companies already "deal" with the tax authorities, no matter what goods you are bringing, the tax is charged on the basis on the container sizes. Those buyers would be considered as local buyers in the alibaba sales.

Closing, it is just not true to consider USD1200 per chinese spent through Alibaba. Nor is it true that only 9% was international buyers.

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